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Trump’s trade team to China: Root for Lighthizer and Navarro
The president is about to send a delegation of trade officials to China, led by Secretary of the Treasury Steven Mnuchin and including chief economic adviser Larry Kudlow, US Trade Representative Robert Lighthizer, and Peter Navarro, head of a trade policy shop in the White House. As readers of these pages are well aware, I have often been critical of Navarro’s bizarre economic theories and Lighthizer’s destructive approach to the World Trade Organization (WTO) and his wanton attraction to tariffs. But in this instance, I am pulling for Lighthizer and Navarro — assuming they stand up for their hard-line stance regarding Chinese high-tech protectionism.
As is often the case with Trump administration forays into trade policy, there is great confusion regarding the agenda and goals for the upcoming trip. The president flips back and forth between tough language against China (and his foolish notions about “fixing” the trade deficit) and breezy expectations that “we have a very good chance of making a deal.” Secretary Mnuchin has little experience with trade negotiations, and Kudlow, while a visceral free trader, will be under pressure to please the president and declare victory for the administration at the conclusion of the upcoming talks, no matter the actual outcome. Whatever their faults, both Lighthizer and Navarro know in great detail the complex elements of China’s state capitalism and its entrenched mercantilist protectionism — and their corrosive impact on the US and the world trading system.
Washington Post columnist Josh Rogin has correctly warned that the Trump team may walk into a Chinese “trap.” Over the past month, President Xi Jinping and other top Chinese officials have offered some concessions to Trump — promising to open up the Chinese financial sector further, buy more US natural gas, allow foreign firms full ownership in the automobile sector (after 2022), and lower some tariffs — but much of this consists of previous promises and peripheral issues. Accepting these trade crumbs as a triumph would be a huge mistake. As I have warned previously and as Rogin underscores in his piece, “None of this addresses the larger issues, including China’s predatory investment, as well as flouting international trade commitments, forced technology transfer, intellectual property theft, and attempts to unfairly dominate future technology sectors through state-sponsored ‘national champion’ corporations.”
Issues and evidence for US negotiators
In a rare instance of careful research, the Trump administration documented numerous examples of China’s mercantilist practices and regulations in its report supporting the invocation of Section 301 of the 1974 Trade Act (unfair trade practices). That report, supplemented by additional prosecutorial material from the United States Trade Representative and US intelligence agencies relating to commercial cybersecurity incursions, should form the basis for a trade agenda that extends far beyond the limited “concessions” China has put on the table. What follows is an illustrative (but incomplete) list of issues that US negotiators should raise with their Chinese counterparts.
- Forced technology transfers and joint ventures. The issue of forced technology transfer is rooted in the Chinese laws requiring foreign corporations to enter into joint ventures. The US should demand that 100 percent ownership be allowed in all sectors, unless Beijing can defend a “strategic” purpose for a particular sector.
- Sectors completely closed to foreign investment. The US should begin negotiations to whittle down this list to those areas that are directly related to national security.
- Intellectual property (IP) theft (including cybertheft). After several years of decline, there has been a recent uptick in Chinese-controlled instances of attempted IP theft. US negotiators should warn their Chinese partners that in the future the US would ban from US markets any Chinese corporation that has benefited from IP theft, even if the Chinese entity cannot be directly connected to the theft.
- Chinese IP law and regulations. Chinese laws and regulations limit the ability of foreign corporations to defend their patents and copyrights and seek redress for violations. The US should request changes in these laws that would strengthen IP holders’ ability to fend off bogus claims of novel advances to the original invention.
- Chinese subsidies. The US has already accused China of illegally refusing to notify the WTO about huge industrial subsidies, and it should pursue this course with a full-blown WTO case. Additionally, in the upcoming meetings, US negotiators should raise directly published reports that Beijing has committed at least $40 billion in state subsidies to the semiconductor sector. How could such direct subsidies not violate WTO anti-subsidy rules?
- The Great Firewall (censorship). At least one-third of the 25 most popular worldwide websites are blocked in China. The US should notify Chinese officials that it is mounting a WTO case against this blackout. There is some WTO case law that points to a violation of WTO rules if a member invokes the national security or public order exemption clearly as a ruse for sectoral or corporate protection.
- China’s national security and cybersecurity laws. These new laws contain sweeping definitions of security, taking in many sectors far beyond China’s true defense imperatives. In addition, they prescribe so-called security reviews that will mandate opening key technologies to government scrutiny, including the possibility of scrutinizing software source codes. The US should demand that Beijing define security more precisely and limit the reach of the new security legislation, which as they stand are clearly vehicles for industrial espionage.
Options for retaliation
The Trump trade negotiators certainly will not achieve major breakthroughs in this first foray. But they can at least put on the table the major trade and investment obstacles that form the core of Beijing’s anticompetitive regime of state capitalism. Should Xi Jinping refuse to budge — as my AEI colleague Derek Scissors has warned — the US should then institute a combined set of countermeasures. Certainly, a wave of WTO actions should be mounted expeditiously.
Beyond this bow to multilateralism, President Trump has vowed to levy $150 billion in tariffs on Chinese goods under Section 301 (alleging unfair trade practices). Tariffs, however, have important limitations and downsides. First, unless the Chinese practices under challenge are outside the purview of WTO rules, the US will lose any case brought against it for the unilateral use of Section 301. Beyond that, tariffs are not an efficient method of dealing with the myriad of protectionist rules that underpin Chinese mercantilist protectionism.
Reciprocity of investment and capital markets represent a more fruitful path. Should Beijing remain obdurate against market-opening reform, the US should progressively close off sectors to Chinese investment and operations in this country. Further, in a progressive ratcheting up, Chinese companies should be excluded from US capital markets, including stock exchange listings and the use of American underwriters for capital offerings. Unlike rules governing tariffs, the WTO has much less supervision over investment policy and capital markets. Thus, the US would be less vulnerable to valid challenges in Geneva.
In the end, the key to any success in US-China trade and investment negotiations is perseverance and a long-term strategy. What happens this week in Beijing will constitute only an opening bid in a tortuous process.
UPDATE: After this piece was completed, the White House made last-minute additions to the China trade team, adding Secretary of Commerce Wilbur Ross and White House economics assistant Everett Eissenstat. Eissenstat adds real trade savvy heft to the delegation — but the themes in the piece remain valid.